Canadian Royalties Dashes Ahead With Nunavik

SITE VISIT

Kangiqsujuaq, Que. — A stone figure peers down at the cluster of tents and stacked crates of drill core samples at Canadian Royalties’ (CZZ-T, CRYAF-O) Mequillon camp, part of the Nunavik Nickel project. Mequillon is one of several deposits in Nunavik, Que., that the company hopes to be mining in two and a half years.

The inukshuk has stood sturdy and still while geologists and drillers –working feverishly since the snow melted in late June — drill hole after hole into the ground to expand nickel resources as much as possible before the harsh weather returns.

Commonly identified as several rocks balanced on top of one another, Inuit make inukshuks for several purposes, such as to mark a place of respect or as help in the caribou hunt.

But perhaps the function of this inukshuk, made by Canadian Royalties employees, is to show direction or warn of danger.

Operating in a region with extreme weather, located 500 km from the Arctic Circle, and inhabited by hungry wolves and polar bears can be dangerous.

But then again, a little guidance is always welcome when exploring a 1,039-sq.-km property made up of 2,500 claims.

“A property this size is something you get excited about,” says vice-president exploration Grant Arnold. “Where do you drill? You can drill anywhere.”

The property, formerly called Raglan South, is located about 20 km south of the Raglan nickel mine operated by Xstrata Nickel, a subsidiary of Xstrata (XSRAF-O, XTA-L). Raglan currently produces about 1.1 million tonnes of ore per year.

Over the last six years, Canadian Royalties has done enough drilling to complete a bankable feasibility study. Offtake agreements were signed in October with Norilsk Nickel (NILSY-O, MNOD-L) and a preconstruction list is being systematically checked off as the company gears up for production by the second quarter of 2010.

The feasibility study looked at mining three deposits (Mesamax, Ivakkak and Expo) at a rate of 3,500 tonnes of ore per day, or 1.28 million tonnes per year, to produce 26 million lbs. nickel in concentrate, 38.8 million lbs. copper in concentrate, 900,000 lbs. cobalt in concentrate, 14,500 oz. platinum and 78,600 oz. palladium per year.

The project cost is estimated at $466 million, to be financed through equity and debt, and with a current mine life of nine years, the payback period is projected at two years.

During the first four years, all three deposits will be exploited through open-pit mining at a cash cost of $58.87 per tonne of ore. Years 5 and 6 will focus on exploiting Ivakkak from underground and on Expo’s open pit at a cash cost of $66.28 per tonne. Production during the project’s final two years will come entirely from Expo at a cash cost of $53.65 per tonne of ore.

Taking care of tailings over the 9-year mine life means an extra $4 per tonne in cash costs, but once Expo has been mined out, the company will permanently close the cells and acid waste rock dumps where the tailings were deposited and begin using the Expo pit for tailings disposal. This will reduce operating costs for the next 20 to 25 years, should the company expand resources to last that long.

“In our view, it’s quite expensive,” says president and CEO Richard Faucher. “But after that you have minimal costs.”

The other option would have been a normal tailings pond, constructed with the assumption that the permafrost would freeze it.

“But because of climate change, we did not want to take the risk with that,” Faucher says.

That’s not the only risk Canadian Royalties is avoiding as it sprints toward construction next year.

The company signed an option to acquire up to 80% of the 500-claim Expo-Ungava property, which consists of the Expo and Mesamax deposits, in 2001 with Ungava Mineral Exploration, a subsidiary of Ungava Minerals (UGVAF-O).

Over the years, Canadian Royalties has had to acquire its growing interest through arbitration, despite the agreement. Now that the company has completed a bankable feasibility study and is moving towards production, it is trying to ensure the terms of the deal are upheld.

“We’re not taking a chance this time,” Faucher says. “We’re going to arbitration (right away) to make sure we get the eighty per cent as it was agreed.”

Ungava also has a 2% net smelter return.

Canadian Royalties hasn’t let the ongoing arbitration slow productivity. The company plans to do an updated bankable feasibility study in 2008, which will include drilling from this year.

Since 2005, the company has completed more than 9,000 metres of drilling at its Mequillon deposit alone, resulting in a 94% increase in the resource estimate and improved metal content.

Mequillon has an indicated resource of 5.4 million tonnes grading 0.74% nickel, 1.07% copper, 0.04% cobalt, 0.23 gram gold per tonne, 0.7 gram platinum and 2.65 grams palladium. The deposit is going to be incorporated in the updated study, along with an assessment for open-pit and underground bulk mining, which will increase the current mine life.

The 2007 exploration campaign has focused on expanding resources, and included more than 17,000 metres of drilling. In August, a new zone was discovered, called Allammaq, which means “clear sky” in Inuktituk. The company hopes to have an inferred resource for it by early 2008.

The discovery hole at Allammaq intersected 8.3 metres grading 0.6% nickel and 1.22% copper. A 6.6-metre intersection graded 1.68% nickel and 2.34% copper.

As Arnold points out the site of the Allammaq discovery on a tour of the property, crisp winds blow right through coats normally too heavy for September.

Looking out over the barren land where a drill rig is still in action, Arnold says today’s sharp blue skies and rolling white clouds, which create dark shadows across the tundra, reminds him of the “picture perfect” discovery day.

“The day we hit was like this, but twenty degrees warmer,” he says. “But we’ll keep going as long as we can.”

Drillers must add salt and heat the water so it won’t freeze. Arnold says that, luckily, the lakes near this deposit are quite deep, giving the exploration crew more time.

It’s the geology that keeps Arnold going.

“You see how rusty these rocks are?” Arnold says, picking up a rock. “There are good-looking rocks everywhere, but you don’t know until you drill.”

Drillers and drill samples come and go by helicopter as the only roads are those the company has constructed itself. A 16-km road was started last July to provide access to the Expo site at a cost of $5 million. For Nunavik’s raw terrain, roads are often built along eskers — ridges of gravel and sand deposited during glacial melt by open channels on surface or beneath the glacier in an enclosed tunnel.

Aside from being more expensive, any form of precipitation can make travel by helicopter dangerous and limited.

Weather can also have an impact on shipping concentrate.

Faucher says the company recently signed an agreement to sell concentrate to Norilsk Nickel subsidiary Harjavalta Oy, because its new fleet of icebreakers will ensure the company can ship concentrate when it needs to. The only restriction is between March and mid-June when Arctic ice cannot be broken to access the port in Deception Bay, which is about 90 km by air from the project, due to a deal made with the Inuit to avoid disruption of the seal hunt or mating season.

Up until the mid-1990s, the shipping season along the Hudson Straight lasted only 75 days, but ice-strength vessels that can smash through metres of ice, have extended the season to eight months a year.

Under the deal, Norilsk will also participate in a private placement valued at $25 million for $3.45 per share. To ensure the project is completed, Canadian Royalties may ask the Russian company for an additional $25 million in financing.

Faucher says Norilsk also demonstrated that recovery rates could be improved by 3-4%, and that it could produce a much higher co
ncentrate grade — up to 18% from 12%.

Another reason Canadian Royalties went with Norilsk was guaranteed access to the Arctic Ocean.

“We were very concerned about the availability to ship concentrate at any time,” Faucher says.

The company could have sought a deal with Xstrata Nickel, but when it was working on the bankable feasibility, the companies could not agree on sharing the port at Deception Bay. Xstrata has rights to the port, similar to a mining lease.

With Xstrata’s plan to double production from its Raglan mine to 2 million tonnes of ore per year, a second port is needed, regardless. That will cost Canadian Royalties an estimated $60 million.

Although company chairman Glenn Mullan says that Xstrata wasn’t very interested in making deals with the company two years ago — it was reluctant to let Canadian Royalties use its Donaldson airport — things are changing because now Canadian Royalties has moved beyond exploration.

“They viewed us as the little kid next door,” Mullan says. “But now they are seeing the synergy.”

Faucher would like to see a partnership formed for an Inuit training program. The company plans to employ 80 to 90 Inuit once mining begins out of 270 possible positions.

He says there have been talks with Xstrata and Makivik Corp., which represents Nunavik Inuit and oversees political, social and economic development in the region, to form a joint program.

Faucher says working together will avoid duplication and prevent competition.

“The object is to contribute to the training. . . to introduce the Inuit to operations so they can earn a wage like everyone else,” Faucher says. “It’s better if we develop these things together because we are pretty well neighbours.”

Nunavik, which covers 500,000 sq. km north of the 55th parallel, is forming a regional self-government within the province of Quebec by 2011, similar to that of the federal territory Nunavut.

With a population of 11,000 spread across 14 coastal communities, the region is 90% populated by Inuit, who were a nomadic people for thousands of years, up until about two generations ago.

Two industries that could help develop the region’s economy are mining and tourism, and the population is aware of the opportunities that await.

With regard to mining, the Quebec government created the Far North program to foster closer relations with the Inuit and to ensure their full participation in the development of Nunavik’s vast mineral wealth.

A short helicopter ride from the Nunavik Nickel project is a new national park established around a lake that forms a perfect circle and glistens a deep blue. The Pingualuit crater, formerly known as the Chubb crater, is the result of a meteorite that struck Nunavik 1.4 million years ago. The 3.4-km-wide basin created by the impact is now filled with exceptionally pure water reaching to 267 metres depth.

An interpretation centre is being built nearby that could cater to tourists wanting to hike a few hours to the crater shore.

When an Inuit woman serving tea and freshly baked muffins at the site hears that today’s surprise guests include the chairman of Canadian Royalties, she perks up.

“I know Canadian Royalties,” she says to Mullan. “I’m going to apply for a job.”